Health Savings Account: An Investment and Retirement Account?

January 25th, 2022 • Blog

Garrett Kelly, CPA

Many folks understand a Health Savings Account (HSA) is a tax-advantaged medical savings account that is paired with a high-deductible health plan. Contributions are tax-deductible and the funds can be distributed out tax-free for qualified, out-of-pocket medical expenses. If used for non-medical expenses, the distributions are taxable and face a 20% penalty. However, many do not understand the investment opportunities and retirement planning opportunities that an HSA provides.

Most people who have an HSA are unaware that you can invest the funds in various stocks, bonds, mutual funds, etc. (depending on the HSA provider and HSA balance). An HSA invested over a decade or two can generate some significant earnings that can be utilized for future medical expenses and/or treated as an additional retirement account. Once the owner of an HSA turns 65, the funds can be distributed out for non-medical expenses as taxable distributions, similarly to how distributions from a traditional IRA would be treated. After age 65 the funds can continue to be distributed out tax-free, and penalty-free, for out-of-pocket medical expenses.

Common Scenario
A common situation couples in their 40s or 50s find themselves in is having the desire for additional retirement savings and/or additional savings for medical expenses that will be incurred during retirement. If a couple, both age 50, contributed each year the maximum contribution limit to their family HSA, and never invested the funds, the balance after 15 years would be $118,000*. However, if invested with an average annual rate of return of 8%, the balance, including earnings, would be $209,983. Not only would this couple receive a pre-tax payroll deduction, or above-the-line deduction, for each year’s contribution, but they have multiple options as to how they can spend these funds after age 65.

Extra Planning Tip
If you had an HSA open during a year that you incurred unreimbursed, out-of-pocket, medical expenses, and never used your HSA to refund you for those expenses, you can still refund yourself with your HSA for those prior year medical expenses. This can be done for any year that the HSA account was open. The HSA reimbursements do not need to be reimbursed in the same year that the out-of-pocket medical expenses were incurred.

Long story short, HSAs are under-utilized for investment and retirement purposes. If you have an HSA, and would like to take advantage of the tax deductions, investment opportunities, or retirement planning opportunities, feel free to reach out to us and we would be happy to walk you through the options you have.


* – 2021 Annual Family Plan Contribution Limit: $7,200 (plus an additional $1,000 catch-up contribution once 55 or older)

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